July 27, 2005
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Prepared at the Federal Reserve Bank of Kansas City and based on information collected on or before July 18, 2005. This document summarizes comments received from businesses and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials.
Reports from all twelve Federal Reserve Districts indicate that economic activity continued to expand in June and early July. Richmond and Dallas reported that the rate of economic growth increased, and Cleveland said economic growth was stronger and more balanced than in the spring. New York was the only District to report a slowing in the rate of economic growth. Among the other Districts, Atlanta, Minneapolis, Kansas City, and San Francisco characterized the pace of expansion as solid, while Chicago described the rate of economic growth as moderate. Boston, Philadelphia, and St. Louis did not characterize the overall pace of expansion, although Boston noted that locally-based retailers were not sharing in the expansion.
Most Districts reported increases in retail sales, and vehicle sales in nearly all Districts were boosted by a new round of price discounting. Demand for most services, including tourism, continued to increase across the country, and most Districts noted moderate to solid expansions in manufacturing activity. Commercial real estate activity improved in most Districts. Residential real estate activity remained strong overall but showed a few signs of cooling in some Districts. Bankers reported solid or increasing loan demand.
Labor markets generally continued to improve, although hiring in several Districts was mixed. Skilled worker shortages were reported in several Districts, but nearly all Districts said wage pressures remained moderate. Overall price pressures eased slightly or remained unchanged in most Districts, despite substantial increases in energy costs.
Nearly all Districts that reported on vehicle sales noted improvements, which were generally attributed to a new round of price discounting by some automakers. Cleveland reported dramatic gains, saying all types of dealerships benefited from increased buyer traffic. San Francisco also said vehicle sales rose substantially in response to the price cuts. Only St. Louis cited mixed reports on auto sales. Sales of most types of vehicles were characterized as strong, although Philadelphia and Kansas City reported some weakness in sales of large SUVs. Auto dealers in the Philadelphia and Dallas Districts were somewhat concerned about future auto sales, but Kansas City said dealers expect strong sales to continue.
Services and Tourism
Tourism continued to show strength throughout much of the country. New York reported that hotel occupancy rates in Manhattan were near record levels and that room rates were up substantially from a year earlier. In addition, Atlanta said hotel occupancy rates in the Miami area were at record levels, and theme park attendance was ahead of last year's pace. Chicago and Kansas City also noted an increase in demand for hotel rooms since the previous survey. Tourism activity over the Fourth of July was characterized as being particularly strong in parts of the Richmond and Minneapolis Districts. San Francisco reported continued strong growth in visits to key tourist destination states.
Activity in a wide variety of manufacturing industries was characterized as strong. Boston and San Francisco reported strength in aircraft and high-tech manufacturing, and Atlanta and Dallas said refineries were doing quite well. Several Districts also noted strong activity for producers of construction materials--especially cement--as well as for producers of industrial equipment and materials. While most factory sectors were strong, some weakness was noted among producers of metals and textiles.
Construction and Real Estate
Commercial real estate activity improved in most Districts. Cleveland said commercial builders were experiencing steady improvement and higher backlogs of orders. In the Atlanta District, new construction projects moved forward, and office vacancy rates trended downward but were still high. Contacts in the Chicago District described commercial activity as busier than normal, although activity was slower in Michigan. Commercial real estate activity was described as strong in the Richmond District and as improving in the Minneapolis, Kansas City, and San Francisco Districts. Dallas reported that speculative office construction increased, apartment construction remained high, and hotel markets were hot. Some of the increased real estate demand in the Dallas District was attributed to outside investors attracted by the area's lower real estate prices.
Banking and Finance
Agriculture and Natural Resources
Activity in the energy industry remained strong. Oil and gas activity increased in the Dallas and San Francisco Districts and remained steady in the Minneapolis and Kansas City Districts. Kansas City reported that drilling was constrained due to a shortage of available rigs and regulatory factors, and some oil service firms in the Dallas District were turning down available work due to limited capacity. Dallas contacts also noted difficulty finding qualified engineers and training crews. Atlanta reported a temporary shut-in of some oil and natural gas supplies in the Gulf of Mexico due to Hurricane Dennis. Minneapolis respondents said that mines are operating at full capacity, with exploration activity in full swing across the District.
Labor Markets, Wages, and Prices
Despite generally tighter labor markets, nearly all Districts said overall wage pressures remained moderate. The only wage pressures cited by the Dallas District were in the accounting and energy industries, and Chicago said the only sizable wage gains were in some skilled professions experiencing labor shortages. San Francisco also reported only modest overall wage growth but noted an increasing use of incentive compensation by some employers to attract workers. Rising health-care costs continued to be a concern for contacts in the Atlanta and San Francisco Districts, but Chicago reported that one large health insurance firm plans to implement the smallest premium increase in a decade.
Overall price pressures either eased slightly or remained unchanged in most
Districts, despite substantial increases in the costs of energy and some building
materials. Manufacturers in the New York District reported a marked deceleration
in input prices and expect substantially less upward price pressure in coming
months. Some moderation in input price increases was also noted in the Richmond,
Kansas City, and Cleveland Districts. Overall cost and price pressures were
described as mild in the Richmond District, moderate in the Chicago District,
and largely unchanged from the second quarter in the Philadelphia District.
Kansas City and Minneapolis noted some softening in the costs of steel. However,
many Districts reported substantial increases in the costs of energy, petroleum-based
products, and building materials such as concrete and plywood. Chicago, Cleveland,
and Dallas said that transportation firms were able to pass on much of their
increased fuel costs to customers. However, in a number of Districts, firms
outside the transportation sector were reported as having only limited success
passing on cost increases. Retail prices were reported as either flat or up
moderately from the previous survey.